SEC Charges Raj Rajaratnam’s Brother With Insider Trading

Rajarengan Rengan Rajaratnam was charged by the SEC Thursday for his role in the massive Galleon insider trading scheme.

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Rajarengan “Rengan” Rajaratnam was charged by the Securities and Exchange Commission Thursday for his role in the massive insider trading scheme spearheaded by his older brother Raj Rajaratnam and the hedge fund advisory firm Galleon Management.

The SEC alleges that from 2006 to 2008, Rengan Rajaratnam repeatedly received inside information from his brother and reaped more than $3 million in illicit gains for himself and hedge funds that he managed at Galleon and Sedna Capital Management, a hedge fund advisory firm that he co-founded.

In addition to illegally trading on inside tips, the younger Rajaratnam was “an active participant in his brother’s scheme to cultivate highly placed sources and extract confidential information for an unfair advantage over other traders,” the SEC said.

George Canellos, acting director of the SEC’s Division of Enforcement, said in a statement that “Our complaint against Rengan Rajaratnam tells a sad tale of a man who followed his brother down an illegal path of greed to its inevitable conclusion.”

Sanjay Wadhwa, senior associate director of the SEC’s New York Regional Office, added, “Rengan Rajaratnam profited handsomely from his brother’s insider trading activities, and he may have believed he wouldn’t have to pay a price for his involvement. But now he is learning the true cost of his participation in the most expansive insider trading scheme ever perpetrated.”

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against the younger Rajaratnam.

According to the SEC’s complaint filed in federal court in Manhattan, Rajaratnam repeatedly received valuable insider tips from his brother that he used for illegal trading in the securities of Polycom, Hilton Hotels, Clearwire Corp., Akamai Technologies and AMD. For example, in July 2007, the SEC says, he “made substantial profits trading Hilton stock in his personal account based on a timely insider trading tip from Raj Rajaratnam that Hilton was about to be taken private. Rengan Rajaratnam quickly loaded up on Hilton stock, and the price of Hilton shares jumped more than 25% after the news became public.” Rengan Rajaratnam cashed in his recently acquired position for an illicit profit of more than $675,000.

According to the SEC’s complaint, after Raj Rajaratnam tipped him about an upcoming transaction involving Clearwire Corp. in March 2008, Rengan Rajaratnam complained to his brother that certain nonpublic information they had used to begin accumulating a position in Clearwire stock was about to be reported by the media before they could establish a larger position. “Rengan Rajaratnam nevertheless profited by more than $100,000 in his personal brokerage account and more than $230,000 for Galleon hedge funds based on trades in Clearwire securities,” the SEC says.

The SEC charges Rengan Rajaratnam with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint seeks a final judgment permanently enjoining Rajaratnam from future violations of these provisions, ordering him to disgorge his ill-gotten gains plus prejudgment interest, and ordering him to pay financial penalties.

The regulator’s investigation is continuing.

The SEC says it has now charged 33 defendants in its Galleon-related enforcement actions, which have exposed widespread and repeated insider trading at numerous hedge funds and by other traders, investment professionals and corporate insiders throughout the country.

The insider trading occurred in the securities of more than 15 companies for illicit gains totaling more than $96 million.

Melanie Waddell

Melanie is Washington Bureau Chief, Investment Advisory Group. She also covers regulatory and compliance issues and writes The Playing Field column and Human Capital briefing. Reach her at mwaddell@alm.com. On twitter: @Think_MelanieW

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